Inotiv Stock: Turning Focus To Organic Growth (NASDAQ:NOTV)

Inotiv (NASDAQ:NOTV) has had a mixed performance recently, with revenue soaring over 400 percent in the last quarter, but earnings per share missing by $(9.16).

Its DSA business has been running on all cylinders, but its RMS segment continues to be a work in progress, as the company makes a number of adjustments as it integrates the segment into the company after the acquisition of Envigo.

The non-human primate (NHP) business of the company remains uncertain, as there are expectations there will be lower supply over the next year as a result of the time it’ll take to audit facilities in Cambodia. The lack of supply in the market will drive prices up, but it’s unknown at this time whether or not that’ll make up for the decline in volume.

Over the course of 2022 the company made significant investment in areas like facilities, internal processes, personnel, recruiting, and technology, which for the most part, the bulk of which should be over.

In this article we’ll look at its latest numbers, its strategy going forward, and why I believe this is going to be a year of transition for the company.

Some of the numbers

Revenue in the fourth fiscal quarter of 2022 was $150.5 million, compared to $30.1 million in the fourth fiscal quarter of 2021. Much of that was driven by its acquisition of Envigo in the latter part of 2021, and growth in its DSA segment.

The RMS segment contributed $106.3 million in revenue in the quarter, which was from Envigo, and $44.2 million from the DSA segment, up 46.8 percent from $30.1 million year-over-year. The RMS segment didn’t contribute revenue last year in the same quarter because NOTV didn’t own it at the time.

Revenue for full-year fiscal 2022 was $547.7 million, compared to $89.6 million of revenue in fiscal 2021. The bulk of that came from $382.4 million in revenue from RMS, but its Discovery and Safety Assessment (DSA) boosted revenue by $75.7 million year-over-year.

Adjusted EBITDA in the fourth fiscal quarter of 2022 was $18.3 million, or 12. 1 percent of total revenue, compared to $4.3 million, or 14.4 percent of total revenue for the fourth fiscal quarter of 2021. Adjusted EBITDA for full-year 2022 was $90.5 million, or 16.5 percent of total revenue, compared to $9.3 million, or 10.4 percent of total revenue for full-year 2021.

Consolidated net loss in the fourth fiscal quarter was $(243.6) million, or (161.9) percent of overall revenue, compared to consolidated net income of $9.4 million, or 31.2 percent of revenue in the fourth fiscal quarter of 2021. Consolidated net loss for full-year 2022 was $(337.3) million, or (61.6) percent of revenue, compared to consolidated net income of $10.9 million, or 12.2 percent of overall revenue in full-year 2021.

The loss for full-year 2022 was attributed to “a $236 million non-cash goodwill impairment charge; $23.0 million of post combination non-cash stock compensation expense relating to the adoption of the Envigo Equity Plan; and $56.7 million of fair value remeasurement of the embedded derivative component of the convertible notes issued in September 2021.” Based upon issues associated with NHP, the company guided for revenue to drop to a range of $118 million to $122 million in the first fiscal quarter of 2023. Taking into consideration the potential time it could take to complete the audit of NHPs in Cambodia, and the results of the audit, revenue could also be lower in the second fiscal quarter of 2023, and that would mean revenue guidance of $580 million for full-year fiscal 2023 would be lower than expected. If it were to play out that way, the stock would probably take a big hit.

NHP business

From concerns over whether or not non-human primates acquired by the company are being bred or caught in the wild, the company has decided to stop importing NHPs from Cambodia.

In the general NHP market, Cambodia accounts for over 60 percent of NHP imports to the U.S., according to the CDC. NOTV continues to import NHPs from other markets, but they won’t be enough to meet overall demand, which is having the positive effect of raising prices.

Since COVID, Cambodia hasn’t allowed visitors to the facilities, but for the first time since the pandemic they are opening them up for auditing. The decision to audit the facilities before importing more NHPs is a voluntary step by the company, which is most likely because of criminal charges associated with illegally importing non-human primates into the U.S. from December 2017 to January 2022.

The charges are connected to Orient BioResource Center, which was acquired by NOTV on January 27, and Envigo Global Services, which was acquired by Inotiv on November 5, 2021,

Even in a market hampered by a lack of NHP supply, the company believes it should have enough supply to meet the needs of its clients in its DSA business.

Strategy going forward

After a period of acquisitions, management said the company is going to focus primarily on integrating them in calendar 2023 as a major part of its strategy.

Throughout 2022 the company spent heavily on operations which it expects to pay off in the quarters and years ahead. It spent $36.3 million in internal projects in 2022, with a focus on “recruiting, internal processes, facilities, technology, and personnel.” Part of the process concerning integration will be the shuttering of nine of the 24 sites the company got from the acquisition of Envigo. Overseas plants like those in Gannat, France and Blackthorn, U.K. will take longer to consolidate.

Along with the closures and consolidations, NOTV is also taking steps to make operational improvements, increase prices, and engage in site optimizations which should widen margins in the future.

The company is improving its capabilities and adding capacity at its Rockville, Maryland facility, for the primary purpose of launching its biotherapeutics business. It is also adding capabilities and capacity at its Boulder, Colorado facility, although decided to cut back some on the prior expansion plans at its Fort Collins, Colorado.

When the expansions are completed, the company expects it’ll increase its DSA capacity by approximately 30 percent, and DSA revenue capacity by about $50 million.

For fiscal 2023, it is focusing its efforts on areas of the company that can quickly generate revenue while lowering spend.

Conclusion

NOTV spent a lot more money than it had originally expected in the fourth fiscal quarter of 2022, which was attributed to closure of facilities, consolidation expenses, integration costs, restructuring charges, expenses from terminating M&A deals, recruiting, and validating its new DSA services, among others. Some of those aren’t going to repeat in 2023, and expenditures should come down some throughout fiscal 2023.

With ongoing uncertainty concerning the supply of NHPs over the next quarters, the company is likely to lose revenue until that’s resolved, but because of the demand for NHPs, it expects to be able to boost prices anywhere from 65 percent to 100 percent, dependent upon where they are sourced from. For full-year 2022, Cambodian NHPs accounted for approximately $140 million of total revenue.

With much of its acquisition spree behind it for the near future, and the focus on the company in fiscal 2023 to work on integrating and consolidating the new businesses, while expanding some of its existing facilities, it has a chance to cut back on spend while growing organically.

Taken together, I view this as a transitional year for NOTV. It has put some pieces in place that should add significant revenue growth in the years ahead, but in the near term, until integration and consolidation is completed, issues surrounding NHPs are resolved, and the company proves it can execute on sustainably cutting back on expenses, I don’t think it’s going to surprise in any way to the upside in the year or so ahead.

The stock has taken a beating since November 2021 when it was trading at roughly $60.5 per share, and since plunging to a 52-week low of $3.64 per share on December 21, 2022. It has more than doubled since that time, trading at $8.12 per share as I write.

While it has probably found a bottom, that could be challenged if the NHP audit ends up with unfavorable results, which would significantly challenge its revenue potential until the issues are resolved.

The company has struggled with its acquisition of Envigo Global Services, and until it steadies that ship it’s going to weigh on the company because of the problems NOTV inherited with the deal. On the other hand, if it can successfully integrate it, it has a lot of potential upside.

The bottom line for NOTV is it must improve its bottom line. As the company stands today, there isn’t enough clarity in my opinion to confidently believe it can deliver in the near term on margin and earnings.

For those reasons I think the company is going to struggle until the NHP issue is resolved, and it proves it can lower costs while growing organically. Once it does so I believe it has a lot of potential to consistently grow. That time is not here yet.